Proxy Advisor Recommendations on Auditor Ratification: Who is Listening?

Abstract

The auditor ratification vote provides shareholders with an opportunity to voice their opinions about the company’s choice of auditor, but historically, less than two percent of shareholders express dissent in their vote. Motivated by regulatory attention on the importance of shareholder involvement and the institutional power of proxy advisors on voting outcomes, I examine how proxy advisor recommendations affect shareholder voting for auditor ratification. Specifically, I examine whether low percentages of shareholder dissent in auditor ratification may be due to low levels of dissent expressed by proxy advisors. I find that proxy advisors have a significant influence over shareholder voting outcomes when they do recommend against auditor ratification, but the Against recommendation is rare. Proxy advisors are more likely to recommend against auditor ratification when based on signals in the DEF 14A proxy filing (e.g., the proportion of nonaudit fees), but rarely recommend against auditor ratification when using signals from other filings (e.g., restatements in 8-K filings). This may be due to bias given to readily available information or to underperformance in a credence goods scenario. I discuss the implications of these findings, which should be of interest to regulators, investors, public companies, and audit firms.